A public diary on themes around my books

June 14, 2006

Scaling up is good. Scaling *down* is even better.

The world rightly marvels at Google's ability to scale its service up to handle billions of searches a month on megascale server farms of tens of thousands of densely-packed machines. But an equally impressive feat is an entirely different kind of scaling: its ability to build a business that works as well for its smallest customers as it does for its largest.

In traditional business, small customers are all too often a barely-tolerated distraction on the road to getting big customers. They can cost as much to serve as their richer counterparts but generate less revenue. But digital businesses can be efficient enough to serve people who generate no revenue at all. Even if only a tiny fraction of them convert into paying customers, a small percentage of a very large number can still be a big number.

I call this "scaling down", and it's a core Long Tail competency. Traditional businesses target the top end of the market--the biggest hits and the richest customers--for the same reason that Willie Sutton robbed banks: because they think that's where the money is. If you have only so many salespeople and only so many marketing dollars, such a discriminating approach makes sense. But the lesson of the Long Tail is that, as Nobel physicist Richard Feynman predicted, "there's a lot of room at the bottom."

Just as a Long Tail of product offerings emerges when the costs of distribution fall radically, making it economic to offer practically everything, so does a Long Tail of customers. C. K Prahalad calls one of these markets, the global poor, the "Bottom of the Pyramid" and marvels at its size and untapped potential (I discuss that here). But there are countless others.

Google, for instance, realized that there was more to online advertising than simply stealing share of existing advertisers from other media. There were also millions of potential advertisers out there too small to show up on the radar of any ad salesperson; indeed many of them may not have thought of themselves as potential advertisers at all until the lure of five cents per click lowered the barrier to entry far enough to attract them.

There were also million of potential ad-driven publishers (aka: blogs) too small to have an ad salesforce, but perfectly able to copy a few lines of Adsense HTML to their sites and wait for the Google check. And thus emerged a market that now accounts for nearly half of Google's revenues--a market that didn't exist before because it was considered too insignificant to bother with.

Self-service: give customers all the tools they need to manage their own accounts. It's cheap, convenient, and they'll thank you for it. Control is power, and the person who wants the work done is the one most motivated in seeing that it's done properly.

"Freemium"services. As VC Fred Wilson puts it, "give your service away for free, possibly ad supported but maybe not,
acquire a lot of customers very efficiently through word of mouth,
referral networks, organic search marketing, etc, then offer premium
priced value added services or an enhanced version of your service to
your customer base." Free scales down very nicely indeed.

No-frillsproducts: Some may come for the low cost, others for the simplicity. But increasingly consumers are sophisticated enough to know that they don't need, or want to pay for premium brands and unnecessary features. It's classic market segmentation, with most of the growth coming at the bottom.

Crowdsourcing. From Amazon reviews to eBay listings, letting the customers do the work of building the service is the best way to expand a company far beyond what employees could do on their own.

(image taken from this book, which isn't related but has a nice cover)

» Pure, Unadulterated (and Scalable) Crowdsourcing from Crowdsourcing
I’ve been wanting to give a more in-depth treatment to the T-Shirt company Threadless.com ever since I first encountered them in the course of researching my Wired article on crowdsourcing. Threadless didn’t quite fit within the original parameters of ... [Read More]

Tracked on June 15, 2006 at 12:06 PM

» Scaling Down is Even Better from Pajamas Media
Chris Anderson explores another Long Tail competency enabled by the Internet: "In traditional business, small customers are all too often a barely-tolerated distraction on the road to getting big customers. They can cost as much to serve as their riche... [Read More]

Tracked on June 16, 2006 at 05:15 AM

» The Long Tail from Pajamas Media
Tammy Bruce asks whether markets which chase the Long Tail will eventually fragment society. At The Long Tail, Chris Anderson notices the biggest part of the Long Tail is the global poor, and even greater fragmentation awaits on the way... [Read More]

Tracked on June 16, 2006 at 04:30 PM

Comments

Chris,

Great post.

In many ways scaling up and scaling down require the same type of thinking - systems thinking. You can't scale down to millions of personalized user experiences without building a system that scales up to deal with the (search, traffic, support, etc.) demand from it.

One person is hard to scale in either direction - up or down - because of the inherent limits on a single person's mental and relationship capacity. But intelligently designed technological systems and a huge online population make it possible.

I noted several other examples when I wrote about this before - Cafepress, Paypal, YesVideo and CustomFlix. In each case the key is to have things that work all the way down the tail, and to either derive revenue from each transaction, or to have such low overhead that you can apply a portfolio theory model to your customers, not needing to pick the winners yourself.
This dovetails very neatly with Christensen's 'Innovators Dilemma' - if you build your cost structure for the tail, you can attack the cherry-pickers from below.

Interesting post & idea, but where is the data to underline if the "downscaling" really earns Google a lot of money... I understand the long tail argument, but am not sure if it applies to Google's earnings.

Your four tactics of "scaling-down" are from classic, hard-knocks economics. You deliver the service and then you get paid for it. Anyone in manufacturing knows this to be the case, but we consumers only see the point of paying before you get the service.

What is working is to give introductory services for low or no cost, then upsell to higher-cost services, particularly high-end custom (tailor-made) work.

In rural communities, this is more widely known, since you have to attract and sell to the customer in front of you - repetitively - since your customer is a Long Tail denizen, no matter how you slice it. For all the groceries in Wal-Mart, the Farmers' Market still has more customers than produce - because they deliver better (quality/flavored) goods just the way that customer likes them. Repeating surveys show that people would rather pay slightly more for locally-raised produce and meat than buy something shipped in from (literally) God-knows-where.

Wal-Mart might be getting a large percentage of the local traffic, but only a minority (5%, perhaps) buy all their goods there. Per Pareto, probably 20% of their customers are getting them 80% of their business. This leaves 80% of their customers to buy a minority of their needs through Wal-Mart and the rest through other venues. These other venues only survive by servicing niche/Long Tail markets. I don't get my tires through Wal-Mart as I'd rather pay someone else who only does tires - so my tires stay inflated and last longer. I raise food on my farm and sell the excess off the tailgate or at Farmers' Market locally. But once in awhile, I'll get a Wal-Mart Poor Boy sandwich pre-made, like I occasionally get a craving for a fast-food hamburger or milk-shake.

In smaller communities, companies have to deliver the best service in order to keep getting business. Anyone can sell a milk shake. But some do it a lot better. "Big Box" stores and franchises don't deliver on anything much better than price and speed. I've recently started gravitating away from local commodity feed/fertilizer franchises toward a small outfit, which is much farther away, in order to get my questions answered and also to transition my farm over to organic (which is cheaper to operate and gets much better prices on local markets).

The "Big Box" coop actually sells to the larger grain dealers (ADM) and so is dependent on making every farmer produce identical (commodity) grain. Anecdotal evidence shows that I can get even three times as much for organically-raised grain, which isn't so regulated as to moisture content, etc. This is as the companies who are producing food are seeing that people will pay more for organic-based foods, so they pay the producers more on a direct basis.

The interesting thing about organic food production is that you can always "fall back on" commodity sales if you can't line up someone to buy your organic produce. I was recommended recently to plant food-grade soybeans as you can always sell them as a feed-grade commodity if they aren't quality for food-grade. But you can't plant feed-grade and get food-grade out of it.

Wal-Mart will always be a Big Box store. But the profits, particualrly for small producers, will always be in the niche/Long Tail markets. But the smaller producers are nimble enough to get into and out of these niches before they become commodity-based.

Again, in farming as manufacturing, you have to produce first, then get paid for it.

FREE was available in all digital forms--ebook, web book, and audiobook--for free shortly after the hardcover was published on July 7th. The ebook and web book were free for a limited time and limited to certain geographic regions as determined by each national publisher; the unabridged MP3 audiobook (get zip file here) will remain free forever, available in all regions.